What’s in Your Wallet? Less Than You Think! Capital One Introduces Consumers to the Breakage Model
Published: March 26, 2012
Author: David Rodnitzky
Capital One recently launched a bold promotional campaign for their Venture credit card, offering consumers up to 100,000 miles for signing up. It’s a compelling offer, one that I immediately signed up for. After all, 100,000 miles is worth $1,000 in airline travel! Like all things in life, however, if something’s too good to be true, it probably is, and this offer from Capital One lives up to that adage. You see, Capital One is using a classic promotional technique called “breakage,” and once you understand how it works, you’ll see why their bold claim of 100,000 miles is anything but.
I found a good definition of the breakage model online, so rather than try to concoct my own, here’s someone else’s fine words:
A breakage model is a marketing strategy that uses tricks to get your money and keep it… not always in ethical or even legal ways! Businesses use them to coerce sales, slash away at marketing and fulfillment costs, and rake in extra profits in a way that doesn’t provide actual value for the customers’ money.
Capital One’s offer is a classic breakage model, because the majority of people who sign up for the offer won’t actually get a penny of value from it (but Capital One will get thousands of new credit card customers for free!). To understand their breakage model, you can think of the path from consumer credit card application to awarding of miles to the consumer like a funnel; at every step in the process, some consumers will end up doing something that eliminates them from getting some or all of the miles promised to them. Here’s how the Capital One funnel actually works. For the sake of this article, I’m going to make estimates about the number of people who “break” at each step.Let’s assume that 100,000 people apply to and are accepted for the Venture card. If Capital One had to immediately award each of these people 100,000 miles, the promotion would cost them $100 million!
1. But Capital One requires new card members to go online and enter a unique code to register for the program (the code is sent by email). Let’s say that 10% of the new card members never receive this code or forget to register. Now we’re at 90,000 people who get the miles, or $90 million of cost.
2. And the program also requires you to actually register within seven days of getting accepted, so those who procrastinate on signing up also get nothing. Let’s say of the 90,000 who tried to register, another 10% waited too long and were disqualified. So we’re at 81,000 users and $81 million of cost.
3. If you do register in time, you then have to upload a PDF of your year-end summary from your current credit card, showing the amount of money you spent in 2011. There’s a good chance that many consumers have no idea how to get this info from their credit card company, especially if you don’t have an online account with your current provider. Let’s say that 10% of the remaining users are knocked out at this stage because they don’t know how to get their info. We’re down to 73,900 users, or $73.9 million.
4. It also turns out that the offer isn’t really for 100,000 miles, but rather, two miles for every dollar you spent on your credit card in 2011. In other words, if you spent less than $50K on your card, you qualify for fewer than 100,000 miles. The card I used only had $26,000 on it. Let’s assume that the average consumer spends $1,500 a month on their card, or $18,000 a year. That means that Capital One is actually only giving out 36,000 miles per person, or $360, not $1,000. So the cost of the promotion has now been slashed to $26.4 million.
5. And now for the biggest breakage event: to get your bonus miles, you need to spend $1,000 on your new card within 90 days of “account opening.” Given that it takes “seven to 10 days” to receive your card, that really means that you only have about 80 days to spend $1,000 on the card. My guess is that at least 50% of new card owners won’t spend this much on their new card, either because they simply don’t spend that much on credit cards, or they aren’t going to exclusively use this card. So that reduces the eligible card members to 36,450, or $13.3 million of marketing spend.
6. But wait, there’s one last trick up Capital One’s sleeve. The fine print notes that the maximum number of miles to be given away is one billion, which equates to $10 million in cost to Capital One. So more than 300 million miles that technically qualified for the promotion won’t be counted, because they occurred after the one-billion-mile mark.
Put this all together, and a promotion that appeared to pay consumers $1,000 for signing up for a new credit card ends up paying on average only $100 to new users. Through a combination of tight deadlines, tough eligibility rules, and caps (no pun intended) on awards, Capital One reduces their acquisition cost by 90%. That means more profit for them and less-than-anticipated value for consumers. And that, my friends, is how a breakage model works!
– David Rodnitzky, CEO